And what was announced? The Fed and other central banks jointly agreed to lower interest rates on dollar swaps. Huh?? What?

That’s it. The markets are super-sensitive and will react to just about anything.

What did the press release really say?

The Fed’s press release began:

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to… supply… credit to households and businesses and so help foster economic activity.

Today’s reaction… markets skyrocket!

The 10 Minute Miracle

Global Equity Markets - 11/30/2011 (Source: London's Financial Times)

At hyper-speed world stocks soared the second The Fed’s press release hit the Internet.

The DAX, Germany’s main stock exchange shot up about 3% in 10 minutes! England’s FTSE market shot up 2% in the same time.

In that same 10 minute span DOW futures jumped from about +30 to +280.

Wall Street Markets - 11/30/2011

At this moment the DOW, now open, is up +418 points!

That is lightening fast reaction time… a wonder of modern technology.

Asian markets are already closed for the day so there has not been any reaction from them… yet… but they will be WAY up when they open.

What the heck is a dollar swap?

The dollar is the international currency of exchange. That is a privileged status. Most U.S. multinational corporations conduct their financial transactions in U.S. dollars.

The problem for foreign banks is that they have different currencies and these days do not usually have enough U.S. dollars available to handle all the transactions. That includes all central banks and all the regular banks serviced within their jurisdictions.

The European Central Bank operates in euros; the Bank of England in pounds, the Bank of Japan in yen; the Swiss National Bank in Swiss francs and the Bank of Canada in Canadian dollars.

In order for companies operating in dollars within those central bank’s jurisdictions to conduct business their national currencies must be converted to U.S. dollars and then back again after the transaction. The Fed supplies the dollars for that purpose.

When that happens its called a dollar swap. Most are usually overnight transactions.

Trillions upon trillions of dollars worth of international commerce is conducted through dollar swaps.

There are banking fees changed to central and regular banks for that service on EVERY transaction.

Why are the markets soaring?

The Fed press release continues:

These central banks have agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points. This pricing will be applied to all operations conducted from December 5, 2011. The authorization of these swap arrangements has been extended to February 1, 2013.

Dollar swaps are cheaper… a half of a percent cheaper to be specific! (Oh, BTW, in case you don’t know… a basis point is 1/100th of a percent. So 50 basis points is 0.5%)

The cost of conducting global business just got lowered for a little over the next year. Lowering the cost of dollar swaps acts as a temporary global economic stimulus.

The Fed went on to make an even bigger commitment saying:

As a contingency measure, these central banks have also agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant.

That, folks, is why the global markets are so happy today and are soaring like eagles.

Conclusions

Welll… there you have it. At least for today, anyway, you know why Wall Street and all the world’s markets are having a huge rally.

However, the global economic situation is still bleak to say the least, especially in Europe. Its just as bleak today as it was yesterday and will be for perhaps years to come.

Stock markets are emotional and reactive to legions of complex, conflicting influences. Dollar swaps is only one of them.

Tomorrow, though, is another day.

Tomorrow the markets will soar or crash on tomorrow’s news of the day when today’s news is forgotten.

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Update – 12/1/2011:

The Dow finished the day at +490 points, the largest point gain since March 2009.

As of 8:30AM EST both New York and European equity markets are hold steady onto yesterday’s gains.

On The Fed’s announcement Asian markets had huge rallies when their exchanges finally opened. The Nikkei, Japan’s stock exchanged finished up 2%.

China’s Hang Seng exchange finished up a whooping 6% by the end of its trading day. In addition to The Fed’s announcement the Chinese exchange was also reacting to the Chinese government’s easing of credit restrictions that will help stimulate it’s manufacturing sector. Chinese manufacturing suffered its first reduction in sales in three years last month.